Reference no: EM132716156

Question - In concept the SFAC definition is clear that for an obligation to meet the definition of a liability the entity must be required to deliver an asset of the obligated entity or provide a service. These cases ask you to analyze the concept that to meet the definition of a liability an entity must be obligated to deliver its own asset or perform services. In this analysis, you are asked to ignore current guidane, as the concept is not always applied.

Case 1 - Major manufacturer has negotiated standard terms with all of its major suppliers. The terms allow Major to choose to settle all accounts payable by paying cash or issuing Major common stock.

1. If Major acquires materials from suppliers, does Major have an obligation that meets the definition of a liability? Why or why not? If not, how would you account for it (answer this question regardless of your previous answer)?

2. Should Major classify the amount payable in the equity section of the balance sheet? If so, as what (i.e., using what account title(s))?